* U.S. stocks fall as fears rise of a worldwide recession
* Oil rises on expectations OPEC to cut supplies
* European stocks rise, as oil prices drive energy shares
* U.S. dollar rebounds against yen (Recasts with close of U.S. markets)
By Herbert Lash
NEW YORK, Oct 17 (Reuters) - U.S. stocks fell on Friday after weak U.S. housing and consumer confidence reports added to growing worries about a widening slowdown, while oil prices rose on growing expectations OPEC will cut crude supplies.
Trading was volatile on Wall Street and other financial markets as a wave of forced selling pushed security prices wildly up and down in what has become a daily occurrence.
The U.S. dollar rebounded against the yen in signs of greater risk appetite but gold dropped after the dollar rally triggered heavy liquidations by commodity funds.
The Dow capped its best weekly gain in five years and the broader S&P 500 had its best week since February after a disastrous three weeks that had knocked U.S. stocks deeply into bear territory.
Oil jumped 2.9 percent, spurred by a broader rise across many financial markets and expectations that the Organization of Petroleum Exporting Countries could cut output at an emergency meeting next week.
U.S. crude
The rise in oil prices pushed energy shares in Europe sharply higher, driving up markets across the continent.
U.S. stocks had risen solidly earlier on reassuring results by technology leaders Google and IBM, as well as bargain-hunting.
But a growing fear of recession loomed over investors on reports that showed U.S. consumer sentiment suffered its steepest monthly drop on record in October and housing construction starts fell to a 17-1/2-year low last month.
Given the number of signs that the global economy was headed into a potentially deep recession, investors remained cautious.
"Sentiment remains fragile," said Sudakshina Unnikrishnan, analyst at Barclays Capital. "The macroeconomic uncertainty and recession fears coupled with volatility in the financial markets means any sort of recovery we see in prices could be viewed as temporary," she said.
There were more advancing shares than declining shares on the New York Stock Exchange, but among the 25 most active decliners outnumbered advancing stocks by 2 to 1.
Wall Street turned lower in late trade after a roller-coaster session. Analysts said options expirations could have increased stock market volatility on Friday.
"There is not a whole lot of depth and liquidity in the market. That is what is causing these wild intraday swings in the stock benchmarks," said Thomas Haugh, chief investment officer of brokerage and money manager PTI Securities and Futures in Chicago, who said he doubts the options expiration is a factor in these wild swings.
The Dow Jones industrial average <.DJI> closed down 127.04 points, or 1.41 percent, at 8,852.22. The Standard & Poor's 500 Index <.SPX> slipped 5.88 points, or 0.62 percent, at 940.55. The Nasdaq Composite Index <.IXIC> shed 6.42 points, or 0.37 percent, at 1,711.29.
A number of companies warned of quickly slowing economic growth.
Schlumberger Ltd
Honeywell International Inc
In Europe shares gained 4.2 percent, ending a volatile week on a strong note thanks to energy stocks that tracked a recovery in crude, while drugmakers rose ahead of key company reports next week.
"What helps is that we've ended the week in the same way it started, on an upbeat note," said Mike Lenhoff, chief strategist at Brewin Dolphin.
The pan-European FTSEurofirst 300 finished the week 6.3 percent higher.
The FTSEurofirst 300 <.FTEU3> index of top European shares closed up 4.2 percent at 894.77 points. The index has lost 39.9 percent this year on recession worries and the effects of banking failures.
"This is the most volatile week we've seen," said Thierry Lacraz, strategist at Swiss bank Pictet in Geneva. "The sole intelligent thing is to remain on the sidelines and not make any huge bets."
U.S. government debt wavered as rising stocks tempered the flight to safety.
"Along with everyone else, the eyes of Treasuries investors are glued to what's going on in the stock market," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi. "When stocks go up, the bid for Treasuries goes down. When stocks go down, the bid for Treasuries comes back."
Investors moved money into U.S. government debt in the late stock market sell-off, but signs of more credit supply pared the safe-haven appeal of ultra-short debt.
The benchmark 10-year U.S. Treasury note
The dollar rose against a basket of major currencies, with the U.S. Dollar Index <.DXY> up 0.21 percent at 82.458.
The euro
Gold dropped 2 percent, concluding a volatile week of selling, as a lack of confidence in the financial system and a dollar rally triggered heavy liquidation by commodity funds.
Gold's status as a hedge against inflation was also weakened as investors fretted that a recession could not be avoided amid a deepening financial crisis.
Gold bullion